Saturday, August 17, 2013

Financialization of the economy

When financial markets have more liquidity than can be invested in the
real economy then it goes into speculation. The speculators, which
includes banks, other financial institutions such as hedge funds and
some wealthy individuals, are plainly getting rich so if it isn't coming
from producing valuable products and services for consumers then it is
necessarily extractive; i.e., it comes from claiming a bigger share of
the pie. Better regulation is a fine idea but by itself it will be
largely defeated because ways to speculate will always be found as long
as liquidity is excessive.

Why is liquidity excessive? It has been at least since the 70s when the
last link between the US Dollar and gold was severed allowing the Fed
freedom to manage the money supply mainly for the purpose of avoiding
recessions. The strategy for accomplishing this was to aim for a steady,
moderate rate of price inflation. In an economy without a fiat money
supply a certain amount of price deflation is natural due to
technological advance and accumulation of capital resulting in rising
productivity. I believe persistent excess liquidity resulting in
speculation, excessive debt and the financialization of the economy is
due precisely to the anti-recessionary strategy of the Fed, (also
adopted by other central bankers). Unless we find a better way to either
avoid or live with recessions, speculation and anti-productive
financialization of the economy is sure to continue regulatory reforms
notwithstanding.